Question
60 percent of BlueVal's capital equity has an estimated cost of 22.5 percent. 40 percent of BlueVal's capital comes from debt, with half at an
60 percent of BlueVal's capital equity has an estimated cost of 22.5 percent. 40 percent of BlueVal's capital comes from debt, with half at an interest rate of 10 percent (mortgage rate) and half at 8 percent for the proposed new line of credit. The cost of debt is lower than expected because of the 34 percent expected tax savings.
The following table illustrates BlueVal's capital structurepre and post financing:
Capital Transaction as of December 31, 2010 Proposed New Financing Total After New Financing
Shareholders' Equity 1,726,883 800,000 2,526,883
Mortgage Outstanding 900,000 900,000
Credit Line 800,000 800,000
Total Capital 2,626,883 1,600,000 4,226,883
- Weight the individual capital source costs by their percentage in the company's total capital structure.
- Explain your weightages.
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